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Pre-qualified, pre-approved or pre-underwritten?

Pre-qualified, pre-approved or pre-underwritten?

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Pre-qualified, pre-approved or pre-underwritten?

PETER G. MILLER

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Q: Our real estate broker is suggesting that we forget about getting pre-approved or pre-qualifled for a mortgage and instead get pre-underwritten. What's the difference, and what are the pros and cons?

A: Buyers who need mortgage financing have always been ahead if they have a good idea of how much they can afford before looking for a home. The terms "pre-approval" and "pre-qualified" have been used for decades to describe the interaction between borrowers and lenders before house hunting begins.

However, the terms pre-approval and pre-qualified are used differently by different lenders. For some, it's little more than a very rough estimate of affordability while in other cases it might involve a credit report review and a lot of investigation by the loan officer. The new idea is to get a loan "preunderwritten." This means giving a lender much of the data and paperwork needed for a loan approval. The lender then can come up with a very precise idea of affordability. Pre-underwriting means that questions can be raised early in the lending process, a good idea. Maybe an incorrect item on a credit report can be resolved or a small debt can be paid off.

However, pre-underwriting — as with pre-approvals and pre-qualifications — raises some issues.

First, a pre-underwriting is not a loan commitment. It can't possibly be a mortgage approval because the property has not been identified, there has not been an appraisal, and the loan-to-value ratio is unknown. Second, borrowers need to ask what nonrefundable charges are involved, if any. Third, the fact that the lender has provided a pre-approval does not mean the borrower cannot still search around for better loans. In the same way that the lender has not provided a loan commitment, neither has the borrower.

In the worst case, if you go elsewhere you'll lose application money paid to the lender, but that might be a bargain if you can get a better rate from a new lender.

Shaving one-eighth of a percent on a $150,000 mortgage means you save roughly $185 during the first year of the loan — and additional interest every year thereafter. — CTW Features

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